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Could giving up a daily coffee really save you?

By contributing the cost of a daily coffee to your super, you could boost your super balance and save on tax.

It may be a long way off or only a few years away. But when it comes to retirement, many of you may imagine a time of travel, spending more time with friends and family, and enjoying leisure activities.

However far off your retirement is and whatever your goals may be, having enough money to make them a reality may take some planning.

In this article we’ll show you how the cost of just one cup of coffee a day, can go a long way towards boosting your super for the future.

Make your super work harder

When you put a portion of your before-tax salary from each pay into your super, it’s commonly known as salary sacrificing, a concessional contribution or a pre-tax contribution.

The beauty of this arrangement is four-fold:

It can save you tax. Concessional super contributions are taxed at the concessional tax rate of 15% (or 30% if you earn over $300,000 per year), which is lower than most people’s income tax rate

As the money comes directly out of your salary before your pay hits your bank account, you’re less likely to notice its absence

As some of your salary is going directly into super, you’ll lower your taxable income and that could save you from paying higher rates of tax

It can be set up quickly and easily by your payroll department, and then happens automatically each pay cycle (and you can vary the amount at any time).

Salary sacrifice calculator

Compare the effect on take home pay and super by making personal super contributions, using either salary sacrifice or an after-tax contribution.

Super basics

Let’s look at Laura for example

Laura is 37, and earns $100,000 before tax, excluding her 9.5% employer superannuation guarantee (SG) contribution. She decides to give up one of her two small takeaway coffees each weekday for 48 weeks of the year, which at $3.50 per coffee gives her $840 after tax per year to invest, or $1,377 before tax per year. She decides to contribute this $1,377 into her super as a pre-tax or concessional contribution. Have a look at the table below to see how this works in more detail.

Does nothing

Makes concessional super contribution

Salary

Salary (before tax)

$100,000

$100,000

LESS pre-tax (concessional) contribution

$0

$1,377

LESS income tax

$26,947

$26,410

Net income

$73,053

$72,213

Super

Employer SG (9.5% of salary)

$9,500

$9,500

Pre-tax (concessional) contribution

$0

$1,377

LESS 15% pre-tax contribution tax

$1,425

$1,632

Super (after tax)

$8,075

$9,245

As you can see, by giving up one coffee every work day over 48 working weeks (most people have around 4 weeks of holidays per year) at a total cost of $840, Laura has improved her super by $1,170 in the first year and paid less in income tax.

Start small, and as soon as possible

If you start early, the amount you choose to contribute to your super doesn’t have to be large to have a big impact thanks to the power of compound interest. Many of us are familiar with the concept, where you earn interest on your principal investment and then earn interest on that interest as well.

When compound interest is working for you in your super it’s a powerful savings weapon. So the earlier you begin to add more to it, the better.

Consider your circumstances

Whether a concessional contribution arrangement is right for you depends on your individual circumstances. When deciding whether to make additional contributions to your super and how much to contribute, you should consider your personal financial situation. You’ll also need to check that your employer allows additional pre-tax super contributions.

As with all investments, there are risks associated with investing inside super. Before making an extra contribution, you should ensure you understand and are comfortable with the risks associated with your chosen investment option(s).

There are also limits around how much you can contribute from your before-tax salary. Most people can currently contribute up to $30,000 per year, including their employer's 9.5% SG contribution.

Currently there are higher concessional caps for people closer to retirement. People aged 49 and over can contribute $35,000 per year, including their employer's 9.5% SG contribution. Exceeding these caps can result in financial penalties. For more information on caps and penalties, go to the ATO website.

Or if you need help with strategies around your super and more, talk to your financial adviser. If you don’t have a financial adviser, you can find an adviser in your local area or call us on 131 267 Monday to Friday from 8:30am to 7pm (AEDT).

Please note: It’s important to remember that the Government proposed a number of changes to superannuation in the 2016 Federal Budget. These changes may progress to legislation. See your financial adviser before making any decisions regarding additional super contributions.